DeFi ON RSK- THE SOVRYN SOLUTION. PART I

WHAT IS RSK?

RSK is a revolutionary Bitcoin sidechain as it brings the full power of smart contracts to the Bitcoin ecosystem. When Satoshi Nakamoto developed the Bitcoin blockchain, his goal was to create the ultimate store of value. However, as cryptocurrencies and blockchains evolved, smart contract capabilities are becoming a primary requirement. RSK combines the security and robustness of the Bitcoin token, with the flexibility and usability of a dapp-ready blockchain, based on smart contracts.

WHAT IS SOVRYN?

Sovryn is a decentralized finance (DeFi) provider. The protocol is running on a Bitcoin sidechain called Rootstock Smart Contract (RSK). Sovryn is a one-stop shop for decentralized financial services and offers lending, borrowing, trading, staking, and yield farming. To govern the protocol, Sovryn has launched its native SOV token. SOV token holders can participate in Sovryn’s bitocracy by staking their tokens on the platform. This grants them voting rights and offers participation in Sovryn’s rewards and risks. By design, the SOV token is not required to use the platform’s services, as Sovryn aims to be heavily dependent on Bitcoin.

THE SOVRYN MECHANISM

When it comes to decentralized finance, the Bitcoin network was forced to watch the ICO and DeFi boom from the sidelines. Even though Bitcoin is the largest cryptocurrency by market capitalization, the Bitcoin blockchain was left out of most of the innovations happening with DeFi due to its technical limitations. This only started to change with the Bitcoin Seg Wit upgrade in 2017. The upgrade enabled the creation of Bitcoin sidechains, which was a major step toward decentralized finance within the Bitcoin ecosystem. These sidechains, which are linked to the Bitcoin blockchain in various ways and offer extended smart-contract capabilities similar to those of Ethereum. This allows the execution of smart contracts, which are necessary to run DeFi applications on the sidechains. At the same time, thanks to their linkage to the Bitcoin network, the sidechains inherit the security and settlement assurances thereof. Sovyrn is running on the RSK sidechain. RSK is connected to Bitcoin by merged-mining. Merged-mining is a mechanism that allows Bitcoin miners to provide security for RSK and earn the respective block rewards simultaneously to mining Bitcoin. The magic of merged-mining is that securing a sidechain is a mere byproduct of mining Bitcoin. Thus, miners don’t have to dedicate any extra computational power to secure the RSK sidechain. As an illustration, think of mining as searching for needles in a haystack. Bitcoin miners are looking for red needles in this haystack. Finding one of the red needles allows a miner to add the next block to the Bitcoin blockchain and thus earn a block reward. In the process of searching for the red needles, miners may also find green needles, which allow them to add a block to the RSK sidechain and earn its respective block reward. As a result, the Sovryn protocol can run on a blockchain that has Turing-complete smart-contract capabilities and is secured by over 50% of Bitcoin’s hashrate

rBTC USE ON SOVRYN

To send transactions over the RSK network, Rootstock Bitcoin (RBTC) has to be paid as gas. RBTC is Bitcoin that has been “transferred” from the Bitcoin blockchain to the RSK sidechain. Technically speaking, the coins don’t actually get transferred but locked on one blockchain and unlocked on the other. Consequently, 1 RBTC always equals 1 BTC. To use the Sovryn protocol, RBTC has to be paid for every transaction. But, as RSK is a sidechain, transaction fees are much lower than on the Bitcoin network. The use of RBTC within the Sovryn protocol is one of the most distinguishing factors to competing Bitcoin DeFi protocols running on other Bitcoin-adjacent protocols like Stacks or Liquid. One of Sovryn’s main goals is to provide DeFi services for real Bitcoin. Many Bitcoiners believe that the Bitcoin network is the most secure blockchain in the world and thus bitcoin is the hardest money currently available. Consequently, they have been calling for DeFi services on the most secure chain in the hardest money possible.

Sovryn is therefore aiming to build DeFi services on a sidechain that resembles Bitcoin’s guarantees as closely as humanly possible. The RSK sidechain is currently secured by over 50% of Bitcoin’s hashrate, which is provided by proof-of-work Bitcoin miners. This makes the chain incredibly secure. Further, Sovryn enables investment opportunities for RBTC on their platform. RBTC is currently the closest a Bitcoin surrogate can be to native BTC on a sidechain. This makes Sovryn the go-to place for Bitcoiners seeking to put their bitcoin to use. The single biggest challenge RSK and Sovryn are facing is the process of transferring bitcoin between RSK and the Bitcoin mainchain. It is technically challenging to build a fully decentralized and uncensorable bridging mechanism. Even though the current mechanism, called Powpeg, provides a high level of security, it is still not as decentralized as the Bitcoin blockchain itself.

DEFI OFFERS ON SOVRYN

Sovryn offers a variety of financial services on their platform. Once you are in the Sovryn ecosystem, these services can be used in a truly decentralized manner without ever having to give up control over your private keys. Examples are:

• BTC ⇋ RBTC: Sovryn allows users to get RBTC by sending BTC to a uniquely generated deposit address — and vice versa.

• Fiat → RBTC: Sovryn provides users with a Fiat on-ramp where RBTC can get purchased against fiat. To use the service, KYC is required.

• Swap/Trade: Swap and trade coins and tokens, which are running on RSK

• Margin: Trade with leverage up to 5x

• Lend: Lend out your cryptocurrencies to earn yield

• Borrow: Borrow cryptocurrencies by depositing collateral

• Yield Farming: Earn yield by providing liquidity to a pool

• Staking: Stake SOV tokens to participate in Bitocracy and earn protocol fees

• Launchpad: Invest in upcoming projects

HOW TO USE SOVRYN

Interacting with Sovryn is similar to using other DeFi applications. As is common with DeFi applications, users need a wallet to interact with the Sovryn protocol.

Step 1: Set up a wallet

To interact with the protocol, users need a wallet capable of connecting to the RSK network. Users can either set up the RSK-native rWallet or add the RSK-network to an existing wallet such as MetaMask (to be discussed in details on the next blog post)

Step 2: Connect your wallet to the Sovryn protocol.

Scan the QR code or connect your wallet via browser extension.

Step 3: Buy rBTC

To interact with Sovryn you need rBTC as gas. You can either buy rBTC against currencies within the Sovryn app (click portfolio, then buy), or send BTC to a Bitcoin address generated by Sovryn (click portfolio, then FastBTC). This will transfer your BTC from the Bitcoin blockchain as rBTC to your RSK-wallet. As a third option, you can have an acquaintance send you some rBTC directly to your wallet.

Step 4: Interact with the Protocol

Trade, swap, lend, borrow — put your coins to use.

YIELD FARMING ON SOVRYN

Yield farming is a means of earning interest on your cryptocurrency, similar to how you'd earn interest on any money in your savings account. And similarly to depositing money in a bank, yield farming involves locking up your cryptocurrency, called "staking," for a period of time in exchange for interest or other rewards, such as more cryptocurrency. When traditional loans are made through banks, the amount lent out is paid back with interest. With yield farming, the concept is the same: cryptocurrency that would normally just be sitting in an account is instead lent out in order to generate returns." Since yield farming began in 2020, yield farmers have earned returns in the form of annual percentage yields (APY) that can reach triple digits. But this potential return comes at high risk, with the protocols and coins earned subject to extreme volatility and rug pulls wherein developers abandon a project and make off with investors.

YIELD FARMING IN NIGERIA

The cryptocurrency industry took the world by storm in 2021, especially in emerging economies. According to a Chainalysis research paper on ‘The 2021 Geography of Cryptocurrency Report,’ released in October 2021, Nigeria is ranked 6th in the global crypto adoption index with an index score of 0.26. Nigeria was once the leading nation in Africa in terms of cryptocurrency adoption but according to the report, Kenya leads in Africa, taking the 5th spot with an index score of 0.28.

Nigerians, especially youths, have turned to the cryptocurrency industry in search of ‘greener pastures’ which is majorly attributable to the high level of unemployment plaguing the nation. According to a March 2021 Bloomberg report, Nigeria’s unemployment rate stands at 33.3% as at the fourth quarter of 2020. The report cited the National Bureau of Statistics (NBS). The report further reads:

“A third of the 69.7 million-strong labour force in Africa’s most-populous nation either did nothing or worked for less than 20 hours a week, making them unemployed, according to the Nigerian definition. Another 15.9 million worked less than 40 hours a week, making them underemployed.”

The Nigerian crypto community boasts of over 1,000,000 active users. On the Binance Nigeria telegram page, there are over 70,000 members, and that is just on telegram.

For one exchange, the yield farming fever would not skip such an active community, like in most places familiar sources of information on where to farm include google, social media, etc., popular sites for such information, in particular, are DEFI pulse and coinmarketcap.

However, there are quite a lot of fraudulent farms that would just as soon close down as you stake your funds, or farms with low security that can be easily exploited by security attacks leading to loss of funds from the project and subsequent farm closure.

In Nigeria and the world at large, there is a need to combine finding farms with maximal yields. This is usually calculated as Annual yield percentage APR( basically the percentage interest your crypto would earn if it is locked up in that project for a whole year, including if you reinvest your profits).

Or Annual percentage rate APR (which is the percentage interest your crypto would earn if it is locked up in that project for a whole year minus if you reinvest your profits).

So you balance farms with a high annual percentage yield or rate with farms with adequate security and an underlying sound protocols.

UNDERSTANDING HOW YIELD FARMING WORKS

Also known as liquidity farming, yield farming works by first allowing an investor to stake their coins by depositing them into a lending protocol through a decentralized app, or dApp. Other investors can then borrow the coins through the dApp to use for speculation, where they try to profit off of sharp swings they anticipate in the coin's market price. Blockchain-based apps offer incentives for users to provide liquidity by locking up their coins in a process called staking. Staking occurs when centralized crypto platforms take customers' deposits and lend them out to those seeking credit. Just like in traditional banking, Creditors pay interest, depositors receive a certain proportion of that and then the bank takes the rest." This lending is usually facilitated through smart contracts, which are essentially just a piece of code running on a blockchain, functioning as a liquidity pool. Users who are yield farming, also known as liquidity providers, lend their funds by adding them to a smart contract. Is Yield farming profitable? While yield farming is unquestionably risky, it can also be profitable — otherwise no one would bother attempting it. CoinMarketCap provides yield-farming rankings with various liquidity pools' yearly and daily APY. It's easy to find pools running with double digit yearly APY, and some with those thousand-percentage point APYs.

YIELD FARMING ON BITCOIN USING SOVRYN ON RSK

Through the provision of RSK-powered liquidity pools for decentralized trading, Sovyrn opens harvesting season on Bitcoin. Yield farming involves providing liquidity to a decentralized trading (or lending pool) in exchange for trading fees (or interest) and liquidity mining rewards typically paid out in the protocol’s token. In many cases, this approach has been very lucrative for yield farmers, albeit risky, given the nascent nature of DeFi protocols. While this yield generation model is predominantly found in the DeFi market on Ethereum (and a handful of other smart contact chains), you can now also yield farm on RSK, powered by Bitcoin.

Sovryn provides liquidity pools for token swaps where liquidity providers can deposit assets to earn trading fees and yield farming rewards. Unlike other AMMs that need liquidity providers to deposit two or more assets, however, Sovryn doesn’t require that for all its pools. On Sovryn, users can offer liquidity to a pool of their choice with a single token and still maintain 100% exposure to that token only.

For instance, in the RBTC.RUSDT pool, a liquid provider can choose to offer RBTC only or RUSDT only as liquidity to that pool. The liquidity provider will still be able to earn both fee and liquidity mining rewards. This type of pool is known as a v2 pool. Having said that, Sovryn also has various double-sided liquidity pools, such as SOV/RBTC, XUSD/RBTC, ETHS/RBTC, for LPs who prefer to deposit two assets in a pool.

HOW TO YIELD FARM ON SOVRYN

Now that you have an idea of what Sovyrn offers, let’s take a look at how yield farming works on this leading Bitcoin DeFi app.

To start using Sovryn, you will need to set up a wallet that is compatible with the Rootstock chain. Some Web 3.0 wallets that you can consider if you don’t have one already include Metamask, Nifty, Defiant etc

• Once that is done, proceed to access the Sovryn dApp. On the top right side, click on the ‘Engage Wallet’ button. Remember, you need to add a wallet before you proceed to access the Sovryn dapp to yield farm.

• Next, you will need to convert bitcoin into rBTC. To do that, click on ‘Buy SOV’ where you will find the ‘Top Up Wallet’ section. There, you can send bitcoin that will automatically be converted to rBTC. Click on ‘Top Up Wallet’ and ‘Generate deposit address’ and send your coins to exchange them into rBTC.

• Once that is complete, you can swap your rBTC into SOV or any other tokens available on the platform. Once you have the assets you want to deposit into a liquidity pool, proceed to select ‘Finance’ from the navigation menu and select the ‘Yield Farm’ option.

• The next step will be to select the liquidity pool you want to provide liquidity to. Once you have selected an asset pool, proceed to click on the ‘Deposit’ button found on the right side of your screen. For example, you can choose the SOV/rBTC pool.

• On the pop-up window, key in your deposit amount, confirm the entries keyed in, and then click the ‘Deposit’ button. For this pool, the deposit needs to be created in a 1:1 ratio between the two pooled assets. So, in this case, you will need SOV and rBTC in your wallet. Confirm the deposit using your wallet by signing the transactions.

And that’s it! You are now yield farming “on Bitcoin.” Your deposited assets and the yield farming rewards paid in SOV will show up on the pool’s dashboard under ‘Balance’ and ‘Rewards’.

“Go make that dough”!!!

For more Information on DeFi protocols on RSK visit: https://www.rsk.co/openfinance/